IRS Issues New guidance on OTC Medicines and Drugs

Last week, the IRS issued additional guidance related to the new health care reform law and its impact on over-the-counter (OTC) medicines and drugs.

Summary of the new OTC law: The Patient Protection and Affordable Care Act (PPACA), mandates that expenses incurred for OTC medicines and drugs (with the exception of insulin) will not be eligible for reimbursement under a health FSA or HRA unless you have a prescription.

The new OTC law will apply to all purchases made on or after January 1, 2011. The new law will apply to the tax year, not the plan year. This means that even if your plan year starts in November 2010, the rule will still apply to you (and everyone else) beginning January 1 2011. 

Effective January 1, you will no longer be able to use your FSA/HRA debit card to pay for over-the-counter medicines and drugs, and you will need to obtain a prescription in order to receive reimbursement from your HSA/HRA for these items. That means that you will have to pay for these items out-of-pocket, and then file a manual claim along with a prescription in order to be reimbursed from your FSA or HRA.

What is considered an OTC “medicine or drug”? 

The IRS did not provide specific guidance regarding what is to be considered a medicine or drug under this new law. Nevertheless, at this time we can be reasonably certain that certain categories of items will be considered medicines/drugs and therefore will require a prescription effective January 1, 2011 in order to receive reimbursement from an FSA or HRA. These include: allergy and sinus medications; cough, cold and flu medications; digestive aids; pain relievers; sleep aids; and stomach remedies. Please contact your FSA/HRA administrator for a more detailed list. 

The good news is, you will still be able to use your FSA/HRA debit card for many common health care expenses that are not considered OTC medicines and drugs under the new law. These include: Band Aids; diabetic testing and aids; eye care and contact lens supplies; first aid supplies; insulin and diabetic supplies; reading glasses; and thermometers. And remember, regular prescriptions will not be subject to this rule, so you will still be able to pay for your prescription drugs with your FSA/HRA debit card just as you have in the past. You will also be able to use your FSA/HRA debit card for doctor and hospital visits, as well as dental and vision care, provided such items are covered under your plan(s).

The Age 26 Coverage Mandate vs. the Age 26 Tax Exclusion

This article was written by Gail Olsen (bio), of JD Reinhart Law and republished with her permission.

Two of the provisions in the health care reform act are causing substantial confusion.  They sound similar, but are really two different things:  the first is a coverage mandate; the second is a tax exclusion. 

The Patient Protection and Affordable Care Act (“PPACA”) enacted on March 23, 2010 contains a mandate that, effective with the first plan year beginning on or after September 23, 2010, all group health plans that provide coverage to an employee’s child must provide such coverage until the child’s 26th birthday, regardless of the child’s marital status, residency, student status or financial dependence on the employee.  The first agency guidance on this mandate was published on May 13, 2010. 

This coverage mandate is often confused with the provision in the Health Care and Education Reconciliation Act (“HCERA”) enacted on and effective on March 30, 2010, which expands the tax exclusion for employer-paid coverage of an employee’s child to the end of the calendar year in which the child has not yet attained age 27.  Put another way, the exclusion applies to the end of the calendar year in which the child attains age 26.  The first agency guidance on this tax exclusion was published on April 27, 2010, in IRS Notice 2010-38,  

The coverage mandate applies to “group health plans” including health reimbursement accounts (“HRAs”).  However, it does not apply to “HIPAA-excepted” benefits, such as non-integral dental and vision plans, and other excepted benefit coverages such as most Health FSAs.  Nevertheless, the favorable tax treatment does apply to dental, vision and health FSAs, even though they are not required to comply with the coverage mandate, so plan sponsors may wish to expand their eligibility provisions anyway. 

Sponsors of health FSAs may wish to amend their plans to permit participants to request reimbursements for children up to end of the year in which the child attains age 26.  Although retroactive amendments to cafeteria plans are generally not permitted, Notice 2010-38 specifically allows an amendment retroactive to March 30, 2010 for these purposes.  The Notice also permits employers to amend their plans to allow employees to change their FSA elections mid-year in light of the expanded eligibility for adult children.  These amendments must be adopted by December 31, 2010.

One last note:  Neither the health reform acts nor IRS Notice 2010-38 amended the definition of “dependent” for purposes of “qualifying medical expenses” eligible for tax-free reimbursement under a health savings account (“HSA”).  The prior rules apply for this purpose.

Health Care Reform Law Update

I have attached several documents that allow for you to understand in greater detail the major provisions of the law President Obama has signed as well as an overview of the changes that will occur when the Senate and House agree on provisions of the Reconciliation bill.



Flexible Spending Account Substantiation Mandate

Beginning July 1, 2009, IRS Notice 2008-104 mandated the auto-substantiation of Medical FSA and Health Reimbursements Accounts debit card transactions at pharmacies. 

Auto substantiation refers to the use of an Inventory Information Approval System (IIAS) to isolate eligible healthcare expenses. Eligible healthcare items purchased at a pharmacy that have implemented an IIAS will be substantiated at the point-of-service expenses. The IRS did give merchants a grace period thru December 31, 2009 to comply with the Inventory Information Approval System (IIAS).

This requirement may feel burdensome for employees using the debit cards at pharmacies that haven’t implemented the IIAS system, but will in the long run reduced the dreaded “pay and chase” events for third party administrators, will decrease participant fraud in your programs and reduce financial risk.

Two Levels of IIAS Auto-Substantiation

Healthcare Eligible Total (HET) Each card terminal at an IIAS merchant will “break down” the items purchased and categorize the expense as either healthcare eligible or non-healthcare.  The Healthcare Total is defined as all IRS Section 213(d) expenses (all Medical FSA eligible items).  All non-healthcare products will be declined at the point of sale and will require the customer to use a different form of payment other than the Flex debit card.

Prescription Subtotal (Rx-Only) many pharmacies will implement a higher level of IIAS that will separate the HET into two categories: Medical Over-the-Counter (OTC) and Prescription Rx. Even though this higher-level IIAS system is not mandated, it will facilitate administration for many prescription-only HRA plans.

If your pharmacy is hasn’t implemented the IIAS system your debit card will not be accepted.  A special interest group has been formed for IIAS Standard.  I have attached a list of Compliant IIAS Merchants click here.

New Excise Tax Reporting Effective January 1, 2010 for Violations of COBRA, HIPAA and Other Health Plan Mandates

Effective January 1, 2010, employers who sponsor group health plans now will be required to report and pay excise taxes for failing to satisfy certain federal group health plan mandates, unless timely corrected. The Internal Revenue Service (IRS) issued final regulations regarding new reporting requirements. Starting in 2010, employers (and certain third parties) must self-report and pay excise taxes for failing to comply with the following:

  1. COBRA
  2. HIPAA portability, access, renewability and nondiscrimination rules
  3. The Genetic Information Nondiscrimination Act (GINA)
  4. Mental health parity rules
  5. Minimum hospital stays under the Newborns’ and Mothers’ Health Protection Act
  6. Continued group health plan coverage of postsecondary dependent children on a medically necessary leave of absence under Michelle’s Law
  7. Health savings account (HSA) comparable employer contributions rules, see IRS Regs
  8. Archer medical savings account (MSA) comparable employer contributions rules, see IRS Regs

Affected parties must report the excise taxes on Form 8928, “Return of Certain Excise Taxes under Chapter 43 of the Internal Revenue Code.” Failure to file Form 8928 and pay excise taxes may lead to the imposition of penalties and interest. Form 8928 is available on the IRS Web site.

Employer Practice Points

Dipa N. Sudra of Davis Wright and Tremaine, LLP suggests;

Employers should have procedures in place to identify potential excise tax issues; and relevant employees, such as human resources personnel, should be familiar with the excise taxes noted above. Employers should consider creating checklists of potential excise tax violations and periodically review the checklists.

For example, employers should work with their advisors or COBRA administrators to ensure that there are no COBRA violations.

Employers must also ensure that relevant employees are familiar with recent changes, such as:

  • The two new events under HIPAA permitting special enrollment in a group health plan for loss of eligibility for coverage, or entitlement to a state premium assistance subsidy, under Medicaid or a state child health plan. (Employers should watch out for model notices expected to be issued in 2010 regarding these new events, and should update the notice of special enrollment rights given to employees.)
  • Prohibitions under GINA against using genetic information for underwriting or certain other purposes. In particular, note that there may be violations of GINA if genetic information was obtained before, but used after, its effective date (such as information collected as part of a health risk assessment).
  • Parity requirements for medical benefits and mental health or substance use disorder benefits.
  • Michelle’s Law.

Final Regulations on Excise Taxes for Group Health Plans Released

Group health plans are responsible for compliance with a number of federal laws governing issues such as continuation coverage and portability of health coverage. If a group health plan does not comply with applicable group health plan requirements, the employer maintaining the plan is subject to an excise tax. Employers are also subject to an excise tax if they do not satisfy comparable contribution rules for health savings accounts (“HSAs”) and Archer medical savings accounts (“MSAs”). The Internal Revenue Service (IRS) has issued final regulations on reporting and paying the applicable excise tax, which are effective January 1, 2010

Group Health Plan Rules Subject to Excise Tax

Generally, an excise tax of $100 per individual per day will apply to violations of the following rules (“Group Health Plan Requirements”):

  • Continuation coverage (COBRA);
  • Portability and nondiscrimination for health coverage (HIPAA);
  • Genetic information nondiscrimination (GINA);
  • Parity between mental health benefits and medical/surgical benefits (Mental Health Parity and Addiction Equity Act);
  • Minimum hospital lengths of stay in connection with childbirth (Newborns’ and Mothers’ Health Protection Act); and
  • Continued coverage for post-secondary students with a serious medical condition (Michelle’s Law).

For violations of the comparable contribution rules for HSAs and Archer MSAs, the excise tax will generally be 35 percent of the amount contributed by the employer to the Archer MSAs or the HSAs of all employees within the applicable calendar year.

For more information got to the IRS Regs

GINA Regulations

The Internal Revenue Service (IRS), Department of Labor (DOL) and Health and Human Services (HHS) recently released regulations under the Genetic Information Nondiscrimination Act of 2008 (GINA). GINA amended HIPAA to prohibit employer-sponsored health plans (or insurers) from collecting, using or disclosing genetic information concerning employees or their family members either (1) before or in connection with enrollment or, (2) at any time, for “underwriting purposes.”

For purposes of these rules, “genetic information” is broadly defined to include family medical history. “Underwriting purposes” is broadly defined to include anything that relates to a determination of eligibility for benefits or the determination of premiums or other contribution amounts, including discounts, rebates, incentives and copays.

To Whom Do These Regulations Apply?

All employer-sponsored group health plans except for plans that are considered “excepted benefits” for purposes of the HIPAA portability rules and federal government plans.

What Do These New Regulations Provide?

The new regulations provide that wellness programs that otherwise meet the requirements of the prior HIPAA wellness program regulations violate GINA if they provide rewards for completing health risk assessments (often called
“HRAs”) that request genetic information, including questions about family medical history.

The regulations also provide that a health risk assessment that includes questions about family medical history and that is completed prior to or in connection with enrollment violates GINA, even if no incentive is provided for completing the assessment. The regulations provide that, for purposes of determining whether a health plan expense is medically appropriate, plans may continue to use the minimum necessary amount of the patient’s genetic information.

When Do These Regulations Go Into Effect?

These regulations are effective for plan years beginning on or after December 7, 2009.  

How Do These Regulations Impact Employers?

Naturally, all employers with, or considering, wellness programs and/or health risk assessments should review those practices (and all related notices and election forms) in light of these new GINA rules and the continually evolving Equal Employer Opportunity Commission (EEOC) position on the impact of the Americans with Disabilities Act (ADA).

In two informal opinion letters issued this year, the EEOC has indicated that any health risk assessment that includes disability-related inquiries (and most health risk assessments include such questions) likely violates the ADA unless the health risk assessment is completely voluntary. Based on this still-informal position, the EEOC would not consider a health risk assessment in connection with an employer’s health plan to be voluntary if there is any significant penalty imposed for failing to complete it (or if any significant incentive is offered for completing it). All employers that offer an incentive or impose a penalty in connection with a health risk assessment or similar wellness programs that might involve disability-related questions should consider how this EEOC position would apply to their plans.

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